Tuesday, April 19, 2011

No, there is too much. Let me sum up.

I have to put up one more post about yesterday's news that S&P has changed their "ratings outlook" for US government debt. I wrote briefly about this development yesterday, but there are just sooooo many reasons why it should be treated as a silly irrelevance (a point that some members of the press, as well as many politicians, don't seem to understand) that I can't leave it at that.

Let me count the ways in which S&P's announcement should be deemed irrelevant, as noted by a host of other writers yesterday:

1. It's impossible to imagine how the US could ever default on its debt, since all of its debt is in dollars and the US can create as many dollars as necessary:

Yves Smith: The United States is simply not at risk of default. Default is impossible for a sovereign currency issuer.

2. The ratings agencies have a proven track record of incompetence, at best:

L. Randall Wray: A decade ago Moody’s downgraded Japan to Aaa3, generating a sharp reaction from the government. The raters back-tracked and said they were not rating ability to pay, but rather the prospects for inflation and currency depreciation. After 10 more years of running deficits, Japan’s debt-to-gross-domestic-product ratio is 200 percent, it borrows at nearly zero interest rates, it makes every payment that comes due, its yen remains strong and deflation reigns.

3. Or corruption, at worst:

Barry Ritholtz: If ever there was an organization more corrupt, incompetent, and less capable of issuing an intelligent analysis on debt than S&P, I am unaware of them. Why do I write this? A huge part of the reason the US is in its awful financial position is due to the fine work of S&P... the “negative outlook” of US debt has come about because the inability of Standard & Poor’s to have performed their jobs rating mortgage backed securities. Ultimately, this enabled the entire crisis, financial collapse, enormous budget deficit and now political over the debt ceiling. Of course there is a negative future outlook. Its in large part the work product of S&P and Moody’s.

4. The ratings agencies have access to no information that is not public already. Hence their announcement adds nothing other than the opinion of a few analysts, and should be treated the same way as a warning by analysts at any other Wall Street firm:

Ryan Avent: This is "news" in the sense that S&P said something and lots and lots of news organisations have opted to write about it. But is it news? No, it isn't. Neither the American fiscal position or its political dysfunction will come as a surprise to anyone who's been paying attention. S&P has not struck out boldly in fretting about American borrowing; that's practically the national pasttime.

5. The US budget outlook is not actually a cause for concern right now, at least not for several years. As a long-term matter, yes, the US has a significant imbalance between revenues and spending. But the current frenzied anxiety over the US budget deficit is primarily the result of the recession, which makes deficit projections look much worse that they are likely to be in the medium term. It's myopic to think that large deficits today, or the difficulties politicians have had in reaching a budget agreement in Washington this year, mean that large deficits and budget stalemates are now perpetual.

6. And last but not least: What is a "ratings outlook", anyway? I know that it's meant to convey their assessment that at some point in the future they will foresee the possibility of default by the US government (stifle laugh here). But how exactly is that different from foreseeing the possibility of default right now?

Okay, now that I've gotten that out of my system I think I'm now ready to consign this news to the trash-heap of intellectual irrelevance, where it belongs.

2 comments:

Have to disagree about the impossibility of the US defaulting. Yves has said it. It is popular to say during debates of the US place in the financial world. The logic of the statement is appealing, so if one doesn't think it through, it's easy to believe.

But the reality is that the US can easily default, as long as Congress can choose to do so. The fact that the US has the capacity to avoid default doesn't mean it necessarily will avoid default. Nutty, people sometimes find intimidation a useful tool. Call their bluff, and they may change their mind, deciding that disaster is better than losing face. This Congress? The one in which Ryan is the chairman of one of the most powerful House committees, one in which there are two guys, father and son, named Paul - this one seems capable of default. I could be wrong about that, but I am not wrong in saying that default is possible, as long as it is a political decision. Treasury can always hold an auction to pay for maturing debt. The Fed can always buy up debt. However, certain factions in Congress are opposed to both those actions. The US can certainly default.

kharris: I like your point that default could be a political choice rather than a financial or economic necessity. I think that, in theory, you are correct - politicians could decide to default even if they don't have to. But I would make two points about that.

1. If it's a political choice rather than an economic necessity, then the size of the US budget deficit is really irrelevant. Instead of worrying about the deficit or debt, we should be worrying about the quality of our politicians. That's a fair point, but then let's be forthright about that and separate the discussion about the US's credit rating from the US's economic fundamentals.

2. Given the close ties between Wall Street and the Republican party (and the substantial funding that the Republicans get from Wall Street donors), and given the fact that Democrats are very unlikely to trigger a default on their own, I find it unlikely that we would ever see a real default become a political likelihood. The devastation it would cause in financial markets would terrify Wall Street, so I don't think that they would allow the recipients of their donations to take such a step.

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The Street Light is written by economist Kash Mansori, who works as an economic consultant (though views expressed here are entirely his own), writes whenever he can in his spare time, and teaches a bit here and there. You can contact him by writing to the gmail account streetlightblog. (More about Kash.)